Buy-side pressuring custodians to modernise collateral messaging

Custodians are under pressure to modernise how they communicate collateral calls for buy-side firms, as they prepare for the incoming initial margin rules for uncleared derivatives.

The threshold for initial margin requirements will drop $1.5 trillion to $750 billion from September 2019, and then to $8 billion in 2020, meaning a significant number of buy-side firms will have to post collateral with a tri-party custodian for the first time for their uncleared derivatives.

However, buy-side firms are concerned that the messaging tools custodians use for the collateral management process are behind the times.

“We won’t be able to post margin efficiently if everything is still done by fax,” said Kate Oliverio, vice president of derivatives regulation, Alliance Bernstein. “We need to be on the same wavelength on how collateral messages are exchanged, and need to make sure we as an industry force our custodians to do that.”

Buy-side firm will require timely messaging from their custodians in order to meet intraday margin calls, which could prove difficult through out-of-date methods.

Automation in the collateral management space, specifically the electronification of collateral communication, would help resolve margin disputes for buy-side firms.

In January, Charles River Development (CRD), which is owned by State Street, partnered with collateral software provider AcadiaSoft to automate communication of margin calls for OTC and exchange-traded derivatives.